1. Field of the Invention
This invention relates generally to risk assessment, and, more particularly, to systems and methods for evaluating risks associated with financial transactions.
2. Description of the Related Art
Most financial transactions involve a customer making a payment to a merchant in exchange for goods or services. Many times the payment is in a promissory form, such as a check or debit card, that instructs the customer's bank to pay the merchant from a demand deposit account (DDA). A DDA is an account, such as a checking account, whose balance can be drawn upon on demand, for example, without prior notice. As is well known, the funds promised by the check are sometimes not paid, due to reasons such as insufficient funds in the customer's checking account or fraud. Examples of fraud include, but are not limited to, payments made with checks or debit cards that are stolen, counterfeit, or written for accounts that no longer exist. Thus, although it may be considered good business practice for a merchant to accept promissory DDA payments, the merchant is taking a risk whenever a check or other promissory DDA payment is accepted in exchange for goods or services.
In order to manage these and other financial transaction risks, some merchants subscribe to a service that assesses risks associated with financial transactions. For a given check transaction, a subscribed merchant can send a point-of-sale transaction approval request to the service with information, such as check amount, account identification, and check-writer identification. The service assesses the risk and either authorizes or declines the transaction based on the risk assessment.
The level of subscription to such a service can vary from a service that simply recommends check approval or disapproval to a service that assumes the risk of the transaction by either guaranteeing the check or purchasing the check from the merchant. Thus, it is in the interest of the service to accurately assess the transaction risks.
Check approval systems use a variety of methods to assess risk. Some examples of risk assessment methods include, but are not limited to, reference to historical data about past transactions involving a given customer or a given DDA, and reliance on statistical data gathered about typical risk levels associated with various types of transactions and/or types of merchants. In order to assess a transaction risk, some check approval systems may calculate a risk score based on data received from the merchant regarding this transaction (e.g., check amount, check account identification, and merchant identification) along with other historical data stored by the check approval service (e.g., past performance of checks from this check account, past performance of customers at this merchant, etc.). These and other methods can be used by a check approval service with an aim to providing an accurate risk assessment.
A check approval system is generally configured to approve or to disapprove acceptance of a check in a manner that statistically favors the merchant or the check approval service in terms of probable risk. Thus, transactions categorized as being of borderline high risk, either because of a calculated risk score or because of some other method of risk categorization, may be difficult to assess accurately and may be preemptively declined.
This fact has two unfortunate consequences. For one, good sales may be lost. As an example, a financially responsible check-writer may move to a new area and establish a new checking account. When a check drawn from the new account is processed by the check approval service, a lack of previous historical data for that checking account in the service's databases may lead to the merchant declining the check, and a potentially good sale is lost. A more far-reaching consequence of over-declining borderline risk transactions is the possibility of stimulating negative sentiment towards the merchant on the part of potential purchasers.
In an effort to increase the accuracy of risk assessment, an additional type of potentially relevant information is information directly about the DDA. Two components of DDA information that can be useful are (1) whether the DDA currently holds sufficient funds to cover the check in question and (2) the current status of the DDA (for example, Closed, Open, or Overdrawn). Information for a given DDA may be available by direct access to the bank or other financial institution that holds the DDA on which the check is written, by indirect access via a third party to the financial institution holding the DDA, by request to a separate entity that holds DDA information, or by consulting an internal database, if such a database is maintained, that holds current or near-current information about the DDAs in one or more financial institutions.
DDA information can provide valuable input for making a check approval decision. Currently, financial service providers that have access to DDA information for a given transaction use such information to make an accept/decline decision for the transaction.
However, in some situations DDA information does not significantly add to the ability to make an accurate risk assessment. Many transactions occur that may be assessed relatively easily and unambiguously as being high-risk or low-risk without the input of DDA information.
Furthermore, various types of costs are involved in a DDA access. For example, processing a DDA information access request typically requires a certain amount of time. If an accept/decline decision is being made while a customer is waits at a point-of-sale checkout stand, minimizing wait times may be desirable. Another cost involved in accessing DDA information may be a fee charged by the bank, financial institution, or other provider of the DDA information. Other financial considerations may also be relevant. Furthermore, expenditures of other resources, such as processor time and bandwidth, may be associated with a request for access to DDA information.
Thus, automatic access to DDA information for every transaction may not be beneficial from the point of view of a cost/benefit analysis. The ability to distinguish between check transaction risk assessments that do benefit from access to DDA information and those that do not is therefore valuable input to a check approval decision.
Similarly, current financial service providers that have access to DDA information for a given transaction use the information as a sole decision-making factor.
However, DDA information does not always provide definitive, unambiguous input that makes decision-making automatic, especially given the desire to limit unnecessary check declines. Many other factors are relevant to an accurate assessment of risk. For example, a good customer may write a check on the day before her payday for an amount that she currently does not have in her account, but for which she will have sufficient funds by the time the check clears her account. Decision-making based strictly on current DDA information would unnecessarily turn down this check, whereas a system that takes into account the check-writer's positive historical payment performance might not.
Accessing a DDA may also be desired for final settlement (cashing) of a check or other promissory payment instrument. Several access methods, or paths, exist for accessing DDA information and for the settlement of promissory payment instruments in paper or electronic formats. Use of each of these access paths is associated with a different set of costs (such as fees, time delays, bandwidth, and other resources) and benefits (such as speed of processing, guarantees, and other complementary services), although these costs and benefits are not typically considered in choosing a settlement path when more than one path is available.
Therefore, there is a need for systems and methods that allow for intelligent decision-making regarding when to access DDAs for information, how to access DDAs for information and/or settlement, and how to use information received regarding a DDA for accurate risk assessment.